SEC's Wyly brothers charges may depress GOP donations

RonaldD. Orol

A previous version misspelled Isle of Man.

WASHINGTON (MarketWatch) -- Billionaire Texas brothers Sam and Charles Wyly have created a name for themselves by spending millions of dollars on conservative political candidates and committees, but new Securities and Exchange Commission charges against them are expected to depress - or completely wipe out - their donations to Republicans.

"There is a rich tradition in Washington of not taking money from people who are controversial," said David Brown, partner at the law firm Alston & Bird LLP, in Washington. "Until this is resolved, these guys are in that category."

The SEC on Thursday charged the Dallas-based Wyly brothers with creating an elaborate sham system of trusts and subsidiary companies on the Isle of Man and in the Cayman Islands.

According to the complaint, they sold $750 million worth of stock in four companies -- Michaels Stores, Sterling Software, Sterling Commerce and the firm that's now called Scottish Re
SKRRF
-- where they were corporate directors, without making required SEC disclosures. The agency also charged that the Texas businessmen traded on insider information and made a gain of $31.7 million.

The SEC charges that the Wyly brothers made more than $550 million in illegal gains.

Wyly's attorney, William Brewer III, said the Wyly Brothers have denied the allegations.

"After six years of investigations, the SEC has chosen to make claims against the Wyly brothers - claims that, in our view, are without merit," Brewer said. "It will come as little surprise to those who know them that the Wylys intend to vigorously defend themselves - and expect to be fully vindicated."

Messages left with the National Republican Senatorial Committee and the National Republican Congressional Committee were not returned.

"Given the number of individual donations they've made coupled with the hundreds of thousands of dollars they've given to Republican party committees, they are at the top of GOP bankrollers," said Center for Responsive Politics communications director Dave Levinthal. "Their donations list represents a veritable who's who of Republicans."

Levinthal noted that in recent years, their donations have dropped off a bit, but contributions have continued. He also said the Wyly brothers contributed funds for advertising campaigns against George W. Bush's Republican primary opponent in 2000, Sen. John McCain, (R., Ariz). In 2004, funds also were contributed to Swift Boat Veterans for Truth, another advocacy organization that paid for ad campaigns lashing out at the military record of George W. Bush's Democratic rival, Sen. John Kerry (D., Mass.)

"They [Wylys] cast their political net about as wide as one can," Levinthal said. "Their political largesse was not just enumerated in campaign funds but also in the advertising realm."

Levinthal agreed that the SEC charges will discourage Wyly donations, 99% of which go to Republican causes. GOP candidates and committees are also expected to stop accepting funds from the Wylys, Levinthal added.

"Any time you have a major flashpoint such as this, be it with an individual or company, politicians get very leery of the public relations fall-out that can come with accepting donations of that sort," he said. "When these individuals are being cast in a dim light politicians will see the political realities of the situation and try to extricate themselves from the person or the entity in question. They don't want to be associated with them any more than they have been."

The CRP has reported that politicians and political committees have distanced themselves from both Goldman Sachs Group Inc.
GS, +0.53%
and BP Plc
BP, +0.53%,
this year after both companies have come under fire.

"For both entities they've definitely cut off their political cash almost to nothing in the past couple of months," Levinthal said. "Companies and individuals in the spotlight themselves realize they are under fire and ratchet back the amount of money they are providing. They are giving less and politicians are taking less."

According to the CRP, both brothers have contributed more than $100,000 each to the National Republican Senatorial Committee. The National Republican Congressional Committee has received $106,000 and $54,500 from Sam and Charles, respectively. Both President George H. W. Bush and George W. Bush each received thousands of dollars in direct donations from the two brothers, according to the CRP.

However, Alston & Bird's Brown argues that politicians and committees are unlikely to rush to return donations unless it is determined that they engaged in wrong-doing.

"I wouldn't expect there to be a rush of people returning donations at this stage," Brown said.

Failure to disclose

The SEC charges allege that the Wylys, by selling more than 14 million shares of securities, violated agency regulations requiring investors owning 5% or more of a company's shares to disclose their holdings in a corporation. The agency reported that in one 1996 SEC filing, known as a Schedule 13D, the Wylys disclosed they owned 5.6% of Sterling Software shares, when the SEC alleged they actually owned 22% but hadn't disclosed their stakes held in offshore accounts.

The SEC also alleges that at one point, the Wylys owned 36.7% of Michaels, 33.75% of Sterling Software and 16.1% of both Sterling Commerce and Scottish Re while disclosing that they owned significantly less.

"Such dramatic discrepancies between the Wylys' actual and reported ownership of Issuer securities were common during the course of their scheme," the SEC alleges.

The SEC also alleges that the Wylys violated the commission's insider trading and disclosure rules when they made a "massive" transaction in Sterling Software based on material non-public information in 1999 that they, together with the chairman and vice-chairman of the software company, had decided to sell the company. The eventual sale, to Computer Associates
CA, +0.00%,
resulted in $31.7 million in ill-gotten gains, the SEC contends.

Activist investors

The Wylys have also been known for their activist investor campaigns.

In 2001, Sam Wyly accused Computer Associates and its managers of poor performance and over-compensation and launched a contest to unseat four of the software company's directors and shake up management.

The effort failed and incumbent directors received the backing of roughly 75% of votes cast. In 2002, Wyly accepted a $10 million payment from Computer Associates to drop a proxy battle he had begun to wage against the software company that year.

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